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http://www.theaustralian.news.com.au/common/story_page/0,5744,15261673%255E1702,00.html Dollar set to plunge By Nicki Bourlioufas May 12, 2005 THE good times could be over with the local dollar set to plunge below US70 cents as commodity prices come off highs and foreign investment into Australia slows, according to Westpac Bank. Westpac has forecast the local dollar will fall to US72 cents by December 2005 and to US64 cents by December 2006. "The Australian dollar looks set for a fall in the second half of this year," said Westpac in a research report released today. "The fundamentals do not improve in 2006 either. In fact, the unfavourable trend accelerates." "We will see a combination of factors which have been positive over the last few years become negative," said Westpac senior economist Andrew Hanlan. Westpac says a narrowing gap between US and Australian interest rates will slow foreign investment into the country as the return on investments in Australia becomes relatively less attractive. That will drive down demand for the local unit. While Australian interest rates are forecast to stay on hold at 5.50 per cent, US rates are set to climb to 4 per cent by the year's end and to 4.5 per cent by the end of 2006. "With the US Federal Reserve moving short rates (up) faster than the long end sells off, there will be another consistent weight on the currency through most of the period under discussion," said Westpac. The pace of global growth is also set to slow, "which is a sign that commodity prices will start to peak out," said Mr Hanlan. Already commodity prices have eased, which has hurt resource and oil stocks like BHP Billiton, Woodside Petroleum and Rio Tinto. Westpac expects the huge US current account deficit will stablilise, which will push back up demand for the US dollar, to the detriment of the local dollar. Westpac forecasts Australian interest rates will stay on hold through 2005. "We have argued consistently that the March rate hike was going to be the last in the cycle. We have argued that there is evidence that the economy was already slowing and that the household sector would be particularly sensitive to the move. The Reserve Bank's official communication is now dovetailing with that view," said Westpac. |
